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The seller can record a sale as soon as they ship the goods to their loading dock. The determination of who will be charged the freight costs is usually indicated in the terms of sale. If the Freight On Board is indicated as “FOB delivered,” the seller or shipper will be wholly responsible for all the costs involved in transporting the consignment. Where the FOB terms of sale are indicated as “FOB Origin,” the buyer is responsible for the costs involved in transporting the goods from the seller’s warehouse to the final destination.
- If you are shipping a full container load (FCL), the truck will carry the container to the seller’s warehouse, and the seller will load the cargo directly into the container.
- It is important to note that FOB does not define the ownership of the cargo, only who has the shipping cost responsibility.
- FOB terms like FOB Origin and FOB Destination help define ownership, risk, and transportation costs for both buyers and sellers.
- An FOB shipping point agreement is signed and the container is handed off to the freight carrier at the shipping point.
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Defining the Terms
Traditionally with FOB shipping point, the seller pays the transportation cost and fees until the cargo is delivered to the port of origin. Once on the ship, the buyer is responsible financially for transportation costs, customs clearance, fees, and taxes. Conversely, with FOB destination, the seller pays the shipment cost and fees until the items reach their destination, such as the buyer’s location.
Freight on Board (FOB), is an international commercial term (Incoterms®) indicating the point where costs of shipping and liability of goods transfers from the seller to the buyer. The term, which was defined as part of the International Chamber of Commerce’s (ICC), is the most common agreement when shipping internationally. This means that your shipment is in the proverbial hands of the supplier through the process of transporting them to a port and loading them aboard a ship. For international trade, contracts establish and outline provisions–such as the FOB designation, payment terms, time and place of delivery–for shipments that are being made out of the country. FOB shipping point terms indicate that the buyer assumes ownership of the goods as soon as they leave the supplier’s location.
What is FOB shipping point example?
Responsibility for the goods is with the seller until the goods are loaded on board the ship. When it comes to the cost of shipping, accountants follow the shipping terms to determine who’s responsible for this expense. If goods do not reach the buyer or are damaged upon arrival, it is the seller’s responsibility and the buyer is entitled to reimbursement or a reshipment from the seller. All costs included in a shipment, including insurance and custom taxare accounted for by the seller in a FOB Destination. In international shipping, for example, “FOB [name of originating port]” means that the seller (consignor) is responsible for transportation of the goods to the port of shipment and the cost of loading. The buyer (consignee) pays the costs of ocean freight, insurance, unloading, and transportation from the arrival port to the final destination.
- However, the buyer subtracts the shipping charges from the supplier’s bill rather than footing the bill out of pocket.
- With a FOB destination point contract, the contract is a delivered price, with the transportation cost figured into the final contract.
- Super Widgets, Inc. agrees to ship the goods based on “FOB origin, freight prepaid” terms.
- The buyer should record an increase in its inventory at the same point (since the buyer is undertaking the risks and rewards of ownership, which occurs at the point of departure from the supplier’s shipping dock).
LTL (Less-than-truckload) shipping plays a crucial role in the optimization of freight shipping. The transportation, which does not require a full truckload to help manage inventory, leverages What to Expect from Accounting or Bookkeeping Services individual shipments that can go directly to customers. When accounting for shipping costs, accountants assume follow the shipping terms to determine who is responsible for this expense.
Difference between CIF and FOB
With shipping, you may hear about the ship’s rail, and how costs or ownership transfer when it’s over the rail. That’s because the rail concept, as well as FOB, goes back to the early days of sailing ships. The earliest ICC guidelines were published in 1936, when the rail was still used – goods were passed over the rail by hand, not with a crane. Incoterms last included the term “passing the ship’s rail” before its 2010 publishing.
Specifically, each type of shipping can have the freight costs paid upfront (prepaid), or they may need to be collected after the products arrive to the buyer. Inventory costs are expensive and include not only the cost of goods, but the fees to prepare inventory for sale. The amount of inventory and cost of goods on the books changes as well, depending on where the goods are and the FOB status. And of course, accepting liability for goods adds to the profits and losses, if there is damage during transit.
Why should you care about FOB terms?
Sellers can record a sale when they deliver the shipment to the point of origin, where the buyer assumes the responsibility for the goods. Similarly, buyers need to record the goods in their inventory at that point. Even if the shipment takes a week or two to arrive, the inventory remains an asset in the accounts. FOB clearly indicates whether the buyer or the seller is responsible for bearing the shipping costs. If the seller is responsible, it also specifies terms for reshipment in case of damages, losses, and thefts. Sellers remain responsible for the shipping costs at the FOB shipping point only till the goods arrive at the point of origin.
